/ By tjchinafreight ivy / Shipping

6 common Incoterms mistakes to avoid

6 common Incoterms mistakes to avoid
6 common Incoterms mistakes to avoid

Incoterms are an essential part of any international ocean cargo. It is established by the International Chamber of Commerce or the ICC and sets out clear guidelines that buyers and sellers must execute transactions according to the parts of the transaction identified by each Incoterm.

Incoterms establish rules and responsibilities for both parties that can be used to resolve differences in the event of a dispute. The choice of Incoterm is determined and agreed upon by the buyer and the seller, who not only understand the responsibilities involved with each Incoterm, but also ensure that he/she is able to meet them.

Despite its importance and the potential consequences of misuse, many buyers and sellers are still unaware of some of the key responsibilities of every Incoterm.

In this article, we'll cover the six most common mistakes in Incoterms listed in Incoterms 2010.

1. Containerized goods use FOB

Despite common belief and practice, FOB Incoterm should only be used for non-contained ocean freight. This error is so common that it becomes a misunderstanding that is deeply ingrained in the minds of importers and exporters.

The main risk involved is the port of origin. Under FOB, the risk is formally transferred when the cargo is loaded on board. However, it is common practice for the shipper to hand over the cargo to the carrier at the terminal awaiting loading.

Since the cargo is at the dock, it has not yet been considered on board. Any damage sustained during this period is still technically the shipper's responsibility and the shipper's insurance should cover this part of the process as well.

However, when disputes arise, the shipper can and does often argue that he has done his part. So, in order to avoid hassle, delays and, more importantly, disputes that can lead to a deterioration in the relationship with the supplier, often the result is that the consignee has to bear the cost.

Apart from FOB, FAS, CFR and CIF are also not suitable for containerized cargo due to the above reasons.

2. Do not specify a location

Many people are unaware that Incoterms rules allow specifying locations. In fact, the failure to specify the full address may be controversial, as the ambiguity allows the seller to choose any delivery point he wishes within the general location provided.

This may be inconvenient for the buyer at all, especially if he has to spend extra time and money to transfer the goods to the final location he originally booked.

3. Seller commits to DDP or DAP without checking if he/she can handle import responsibility in buyer country

Under DDP and DAP, the seller is responsible for paying all arrival charges at the destination. With DDP, this includes paying local taxes (eg GST, VAT, etc.) and handling customs clearance at the destination. Note that unlike DDP, DAP does not require upfront customs clearance fees.

The latter requires him to register as an overseas importer in the destination country, a country-dependent process that can require a lengthy and lengthy program.

4. Buyer uses EXW regardless of his/her influence in the export process

This is similar to the role-reversal point of view mentioned earlier. Under EXW, the seller's responsibility is minimal and ultimately ends with the correct packaging of the item.

From then on, the buyer is responsible for export procedures from the country of origin and any necessary communication with the exporting authorities. For the buyer, it may not be that simple, especially if he/she is not familiar with the export process in the country of origin. In some cases, the seller may be required to participate.

5. Using CIP or CIF without checking that insurance coverage is adequate and complies with commercial contract requirements

According to CIP and CIF Incoterms, sellers are obliged to insure the goods. According to Incoterms rules, only minimum coverage (110% of contract value) is required.

However, depending on the conditions of the contract of sale, this may be insufficient and insufficient for the item being shipped. This amount needs to be met if the commercial contract requires more coverage.

6. Failure to align Incoterm with the bank's payment security requirements

This applies to international payment methods, such as letters of credit, whose secure and reliable nature suggests a lack of complete trust between buyers and sellers.

For letters of credit, payment can only be made after submitting the required documents to the bank to demonstrate that the trading conditions have been met.

/ By tjchinafreight ivy / Shipping

Import from China: FOB, CIF or EXW Incoterm?

Import from China: FOB, CIF or EXW Incoterm?
Import from China: FOB, CIF or EXW Incoterm?

FOB, CIF or EXW? The Incoterm you choose to import from China can greatly affect your overall cost. But oddly, it's rarely the focus of your import activity.

Most importers tend to put the lowest possible sales price as a higher priority, ignoring other details. This could end up being a costly mistake. Given their direct impact on import costs, now is the time to start taking a closer look at Incoterms.

Product prices vary by Incoterm

The price of your purchase will vary depending on whether you imported using FOB Incoterm, CIF Incoterm or EXW Incoterm. Many Chinese suppliers include shipping costs directly into the product price, which is why they usually have different price lists depending on the Incoterms used.

Be very careful when negotiating with Chinese suppliers here, as the price difference does not always correspond to the price of sea freight. Suppliers have been known to use this to manipulate buyers into choosing a specific Incoterm that is more beneficial to the supplier. This will be explained further when we discuss the CIF Incoterm.

Incoterms determine the control you have

The Incoterm you choose will define your control over your shipment at every stage of the shipping process. Whoever controls ocean shipping has control over costs and greater bargaining power.

If you let the supplier manage the ocean freight, you must accept the price and conditions he sets with the freight forwarder.

Import from China with FOB Incoterm

FOB Incoterms are probably the favorite - and in some cases only - Incoterms of experienced importers. We are talking about countless imported products with different characteristics, each with their own unique needs.

In my opinion, if you can only choose one Incoterm to import from China, FOB Incoterm will be your best choice. Why? FOB Incoterm gives you more control over your imported ocean cargo without the responsibilities that come with it.

Import FOB and EXW from China

As mentioned, the biggest advantage of using FOB to import from China is the control you have. You also have less responsibility than EXW.

For FOB, your responsibility as the importer is freight, cost of arrival and delivery. This means that any problems at the origin will be the responsibility of your supplier in China. However, with EXW, you are responsible for any problems and unexpected expenses - both at the origin and destination.

In short, while both FOB and EXW Incoterms are considered safe options for importers, there are significant differences in how responsibility is allocated.

Import from China using CIF Incoterm

Buyer's responsibility: payment of goods, arrival fee, customs clearance at destination, inland transportation at destination from port to warehouse, and corresponding import duties.

Responsibilities of the seller: deliver the goods according to the conditions agreed with the buyer, obtain the necessary documents for export, manage the inland transportation in China, manage the customs clearance and pay the corresponding customs fees in China, rent and pay the sea freight, insurance, and original Origin port charges.

For a novice importer, a CIF Incoterm may look very tempting: no need to pay for shipping, no need to choose or negotiate with a freight forwarder, no need to organize shipments, and most importantly, the item is actually cheaper than buying under another Incoterm they.

Import from China using EXW Incoterm

Buyer's Responsibilities: Pay for the goods, manage inland transportation at origin and destination, pay origin, ocean freight, insurance, manage customs clearance at origin and destination and pay appropriate fees, and pay appropriate customs duties.

Seller's Responsibilities: Deliver on the terms agreed with Buyer, provide all required documents and proofs.

What is the best Incoterm when importing from China?

In theory, FOB, CIF and EXW are your viable options for importing from China. Each involves a different amount of risk, liability, cost, and safety.

My advice

Choose the safest Incoterms that give you maximum control over your ocean freight.

/ By tjchinafreight ivy / Shipping

While exporting goods,you may wonder why you need to know Incoterms?

What are Incoterms rules?
What are Incoterms rules?

The International Commercial Terms Rules are official terms published by the International Chamber of Commerce (ICC) and are widely used in international commercial transactions or procurement processes. They are well thought out, standard, globally accepted and complied texts that determine the responsibilities of consumers and traders to deliver goods under contracts of sale in global trade. Incoterms are closely related to the United Nations. Convention on Contracts for the International Sale of Goods. Incoterms are known and implemented in all major trading countries.

Incoterms:

EXW (factory)

According to Incoterms rules, Ex Works (EXW) means that the seller has fulfilled its responsibilities when the goods are normally provided to the buyer at the seller's destination. The seller shall package the goods properly or as specified in the mutual agreement. The buyer is responsible for everything necessary to load the goods in transit and to get the goods to their final destination. Risk or responsibility for the goods passes from the seller to the buyer when the goods are available at that location. This means that the buyer is at risk if the goods are damaged in any way while the buyer is in transit, even if the seller assists with loading. Precautions should be taken.

FCA (Free Carrier)

Free Carrier or FCA is a trade term that states that the seller of goods is responsible for delivering those goods to the destination specified by the buyer. When used in trade, the term "free" means that the seller must deliver the goods to a designated location for transfer to the carrier. Considering that the carrier is nominated by the buyer, the shipping costs under the FCA terms are paid by the buyer. The seller arranges for the goods to be loaded onto the carrier nominated by the buyer.

The seller is responsible for delivering the goods at its location. In this case, it is the seller's responsibility to load the goods on the buyer's means of transport and for delivery to the port and export clearance, including security requirements. Risk transfers once the goods are loaded onto the buyer's means of transport.

CPT (shipping paid to)

Carriage Paid to or CPT means that the seller delivers the goods to the carrier or a person designated by the seller at the agreed place, and requires the seller to sign a contract of carriage and pay the agreed freight for delivery of the goods. The seller must go through the export procedures and the buyer must go through the import procedures. But the seller is not responsible for purchasing insurance.

CIP (shipping and insurance paid to)

Carriage and Insurance Paid To (CIP) is similar to CIP with one important difference. Risk passes to Buyer when Seller clears the goods for export and delivers them to the carrier or another person designated by Seller at the place of shipment. This Incoterms rule requires the seller to take out maximum insurance for the buyer - at least 110% of the value of the goods covered by the ICC (Institute Cargo Clauses) (A) or (Air) or similar clauses to cover the buyer's risk. Seller must provide Buyer with any insurance documentation required by Buyer in case it must file a claim under that insurance.

DAP (Delivered On Site)

Delivered at Place or DAP, this incoterm rule can be used for any shipping method. An extension of DAT, the seller delivers the goods at the destination specified by the buyer, although under ICC rules the unloading of the goods is the buyer's responsibility. The buyer also needs to sort out duties and taxes, as well as clear the goods through customs.

DAT (delivered at terminal)

Previously named Delivery at Dock or DAT, this Incoterm has been renamed to Delivery at Unloading Point (DPU) as the buyer or seller may require the goods to be delivered elsewhere. The term is often used for consolidated containers with multiple consignees, and this is the only term that requires the seller to unload. The seller clears the goods for export and assumes all risks and costs involved in the delivery and unloading of the goods at the named port or terminal at the destination. Buyer assumes all costs and risks from then on, including customs clearance of imported goods at the named destination.

DDP (Delivered Duty Paid)

Delivery After Tax, or DDP, works very similarly to DAP, with one most important difference. Seller must import customs clearance goods in buyer country and pay any duties and VAT/GST. DDP is a risky clause for sellers as they may not be aware of import customs clearance procedures at the import destination. Its value is also uncertain for importers, who must rely on sellers to successfully navigate the complexities of destination countries.

/ By tjchinafreight ivy / International

DDP vs DDU: Shipping Incoterms Explained

Delivery Duty Paid (DDP)

In exporting, the seller enters into an agreement with the buyer to deliver the goods to the buyer's location overseas. Such agreements will specify the terms and conditions under which business will be conducted, especially those that will incur costs associated with the export of goods.
A very important point of the agreement is who will be responsible for paying duties and taxes at the port of destination.
A sale or purchase agreement is called Delivery Duty Paid (DDP) when it is agreed between the exporter and the importer that the former will pay all duties at the port of destination.

Seller's responsibility

In the DDP Shipping Agreement, the seller's responsibility to ensure successful delivery is:

  • Verify that all risks of loss or damage to the goods are financially covered up to the point of delivery.
  • Handle the export process at the point of shipment, complying with all required protocols, such as providing licenses and documentation as required for specific shipments.
  • To bear any costs of customs clearance at the place of delivery. If the product is taxed due to value fluctuation (VAT), the seller will also pay any additional tax.
  • Check that products and shipments arrive at international locations for proper termination of liability.
  • Take financial responsibility for shipping costs from the packing area to the point of delivery.
  • Organize and establish carrier connections with all shipping companies that assist in the delivery of goods.

Delivery Duty Unpaid (DDU)

The ICC stopped using the incoterm DDU in 2010, but it is still widely used. The ICC has officially replaced it with the Incoterm® rules DAP, which is delivered on site, but with the same trade rules as DDU.
DDU means that the buyer is responsible for paying any customs fees, duties or taxes in the country of destination. All these fees must be paid by customs to release the goods after the goods arrive at the pre-agreed location, such as the on-site delivery at Jebel Ali port. The seller is liable until the agreed point of delivery, at which stage the buyer is liable.

Seller's responsibility

DDU shipping and DDP shipping are very similar, but the biggest difference between the two is that the seller does not bear the economic responsibility after the goods arrive abroad. Some of the main responsibilities of the seller in DDU shipping services are:

  • Takes responsibility for providing permits, permits and documents required for delivery to Buyer's pickup location.
  • Ship the buyer's goods to the country of delivery.
  • All financial responsibility is assumed for any damage, theft or loss that occurs in the shipment prior to its arrival at the delivery destination.
  • Make sure that the buyer's goods arrive at the designated shipping location.
  • Pay shipping for any shipping charges related to labor and loading costs. This can also include purchasing insurance for the goods.
  • Provide buyers with the latest information on successful deliveries.

This type of agreement between buyer and seller is called Delivery Duty Unpaid (DDU). The International Chamber of Commerce has replaced Incoterm DDU with DAP (Delivered On Site) in its latest publication "Incoterms® 2020".

How to calculate DDU and DDP fees:

Fob amount. Plus: 1. All local charges at the export port 2. Sea freight (whether positive or negative) is the amount of cif. If you want ddu: plus the local charge at the destination port If you want ddp: plus the destination customs duties in port

Delivery on Place (DAP) and Delivery on Ground (DPU)

In the ICC's latest publication "Incoterms® 2020", the term DAP (Delivered On Site) has replaced DDU. Another important term that has been replaced is DAT (delivered at the terminal). DAT is replaced by DPU (Delivered at Place Unloaded), and the designated unloading location can be anywhere, not limited to the terminal.
DAP and DPU are two Incoterms® similar to DDU. DAP stands for Delivered at Place and DPU stands for Delivered at Place Unloaded. Under DAP, the buyer is responsible for paying duties and taxes and unloading.
The seller arranges the transportation and delivery of the goods to a pre-agreed location, ready for unloading. DAP can be used for any transport protocol.
In a DPU, the seller is responsible for delivery and unloading at the locations specified in the agreement between him and the buyer.